Pennon Group plc (Pennon or the Group) today announces its results for the half year ended 30 September 2024.
Susan DavyGroup Chief Executive Officercommented
"Water companies are rightly being challenged to do more for customers today and invest more for the future. We are doing both. 100% of customers across the south west found their bills affordable for the first time - five years <mark style="background-color:yellow">ahead</mark> of the sector-wide pledge to eradicate water poverty. We continue to lead the way in helping customers to use less and save more with a range of money saving campaigns and pilots. Whilst thats led to lower wholesale water business revenues, its the right thing to do.
"Alongside our bill support, we are delivering record capital investment. Our supply chain amplify is up and running, delivering accelerated K8 investment to tackle the use of storm overflows. We are forecasting growth in regulatory capital of 75% over this regulatory period.
"Underpinned by solid relative operational performance, as assessed in Ofwats latest Water Company Performance Report across all parts of the Group, we have continued to deliver to all of our customers across South West Water, Bristol Water and SES. When things go wrong, as they did for customers and businesses in and around Brixham earlier this year, we put it right, with no excuses. But we know we have more to do.
"As we look ahead, we are energised following our Business Plans for SWW and SES achieving outstanding and good ratings, respectively, from Ofwat. In preparation, we are reshaping the Group and driving cost base efficiency. We are putting more resources on the front line than ever before, streamlining our support functions, with clear business lines, aligned to our four strategic priorities.
"Of course, its not what we are doing but how we do it that also matters. Our operations across the Group need a reliable and efficient power supply and we are investing to increase renewable energy provision through Pennon Power, supporting our Net Zero ambitions.
"Overall, we are well positioned for the future, with lower revenues protected by regulatory mechanisms, as we continue to focus on sustainable growth. Our financial position remains resilient to the challenges ahead, with good liquidity and a diversified debt portfolio. Our plans to restructure the business, as well as the benefits being delivered through integration of SES into our Group, will allow us to deliver efficiently as we move forward."
FINANCIAL PERFORMANCE
H1 2024/25
H1 2024/25
(excl. SES)
H1 2023/24
Underlying revenue^
£527.2m
£450.6m
£448.6m
Underlying EBITDA^
£163.5m
£150.2m
£168.5m
Underlying (loss)/profit before tax^
(£18.6m)
(£13.8m)
£9.1m
Non-underlying items before tax1
(£20.2m)
(£20.2m)
(£5.9m)
(Loss)/profit before tax - statutory
(£38.8m)
(£34.0m)
£3.2m
(Loss)/profit after tax - statutory
(£30.0m)
(£26.2m)
£1.8m
(Loss)/earnings per share
Adjusted EPS
(6.6p)
3.6p
Basic EPS
(10.6p)
0.5p
Dividend per share2
14.69p
14.04p
Capital expenditure
Group (incl. SES)
£331.8m
£266.3m
South West Water
£306.0m
£234.4m
At 30 Sept 2024
At 31 Mar 2024
Water Group
RCV3
£5916m
£5536m
Gearing4
65.0%
64.4%
SWW
Cumulative RORE (realnotional)5
6.0%
7.3%
Cumulative RORE (nominalactual6
10.8%
Financial results for H1 2024/25
· Results for H1 2024/25 in line with management expectation7
· On a like for like basis, lower revenues in South West Water (SWW) compared to H1 2023/24 driven by successful water demand customer initiatives resulting in a loss before tax on both an underlying and statutory basis, with regulatory revenue mechanisms in place to protect future recovery
· As anticipated, newly acquired Sutton and East Surrey Group (SES) incurred a loss for the period - we are focused on reducing interest costs and right sizing the cost base to improve profitability
· Profitable sector leading B2B retailers
Pennon Water Services (PWS) and Water2Business - with plans to consolidate SES Business Water
· Loss before tax for the Group increased to £38.8m reflecting the cost of interventions to return quality water supplies to Brixham (c.£16m) and the costs of restructuring to reshape the Groups activities (c.£4m)
· Capital expenditure run rate is slightly lower than H2 2023/24, but increased by £65.5m on H1 2023/24, as we invest to secure operational improvements
· Solid relative performance for the wholesale water businesses in respect of common Outcome Delivery Incentives (ODIs)
· Balance sheet for the Group is robust with Pennon Group gearing at c.68%8, and total Water Group RCV gearing of 65% (SWW gearing of 64%)
· Strong investment grade credit rating with liquidity of c.£675m in place to support continued investment
· Return on regulated equity for SWW is relatively strong, equating to 10.8% on a nominal, actual balance sheet basis, and 6.0% on a real notional WaterShare basis
· Interim dividend of 14.69p is in line with policy of CPIH +2%
Reshaping our business
· Four clear business units established focused on Water Services, Wastewater Services, Pennon Power and Retail Services, aligned with our four strategic priorities
· Reshaping the Group to drive greater efficiencies, as we grow, with improvements in processes and operational effectiveness delivered and in progress of c.£55m of annualised efficiencies in H1 2024/25 against the targeted c.£86m annualised run rate for K8. The programme is targeted to
o deliver the synergies identified through the water company acquisitions of Bristol Water in 2021 and SES in 2024
§ c.£18m delivered in H1 2024/25 in Bristol Water, and we are on track for the c.£20m targeted by the end of 2024/25
§ c.£2m delivered in H1 2024/25 in SES, with a target of c.£11m
o right size and reshape the Group to ensure we have resources focused on our priorities - bolstering front line staff by c.100, and ensuring we have a best-in-class customer service platform to serve our customers
Investment driving benefit
· SWW capital expenditure in H1 2024/25 broadly in line with the K8 run rate
delivering investments to meet our K7 commitments, support performance in our ODIs and respond to operational incidents as well as accelerate agreed K8 transitional spend and early start planning and design activities
· Investment in water resource diversification continues with the completion of the abstraction and new water treatment works at Rialton - supplementing resources in Cornwall by c.4%, bringing the cumulative resource position to 34% since 2022, with Devon benefitting from the cumulative 30% uplift in availability reported in the 2023/24 results
· Water quality investments are on track including the two new treatment works in Bournemouth - the treatment works will serve c.85% of the population of Bournemouth - with the first works on track for commissioning by the end of 2024/25
· Tackling sewer overflow spills through our WaterFit 2025 programme - preventing c.12,5000 spills with over c.350 interventions, with two thirds of our top spillers in 2023 resolved this year
· Pennon Power solar investments on track with construction underway at two sites equating to c.45% of our targeted generation with first energisation expected at the end of 2024/25
· Supporting customers with c.£110m customer benefit for K7, including innovative tariffs driving water efficiency and affordability
Strong relative sector performance
· Upper quartile performance inSWW on internal sewer flooding and water quality for water and sewerage companies
Bristol Water on customer service
SES Water on supply interruptions and water quality
· Growing and profitable non-household retail businesses - with c.15% market share, strong customer service - with Trustpilot scores for PWS and W2B of 4.8 and 5.0, respectively - alongside a doubling of business retail PBT from H1 2022/23
Underpinned by an outstanding Business Plan for K8
· SWWs Business Plan for Bournemouth, Bristol, Cornwall, Devon, and the Isles of Scilly categorised as outstanding and recognised as a leading plan in July
· Having acquired SES Water in January 2024, Ofwat has assessed their plan as standard, confirming this plan is generally good
· SWW Draft Determination reflects minimum c.30% RCV growth to 2030, with a cost of capital protected against reduction between Draft and Final Determinations, with 30bps upside potential
· SES Draft Determination reflects growth of c.11% and 5bps upside for a good standard plan
· Representations made to Ofwat in respect of risk return balance (particularly focused on ODIs), providing additional evidence for our totex investments, requesting that natural rates are applied for capital charges and the balance between our regions and priorities
· Final Determination confirmed as 19 December 2024
Well positioned for a period of significant growth
· We have a sustainable supply chain to deliver our K8 programme - over 1,000 schemes already underway, with transition expenditure of c.£75m for storm overflows we have launched our Turning the Tide storm overflow investment programme
· Strong investment grade credit ratings secured, with £2.5bn EMTN programme launched and an inaugural £400m public bond issuance. We have access to good liquidity funding through our sustainable financing framework to support our growing capital programme
Notes
All percentage movements are on a half on half basis unless otherwise stated
Results include the results of SES in the current period. SES was acquired in January 2024 and therefore the prior year comparative period excludes the impact of this acquisition
^ Measures with this symbol are defined in the Alternative Performance Measures (APM) section of this document, underlying measures are presented before non-underlying items
1 Non-underlying items are adjusted for by virtue of their size, nature or incidence to enable a full understanding of financial performance.
2 Dividend policy of CPIH+2%. The CPIH rate used is 2.6% at 30 September 2024
3 Forecast shadow RCV at 31 March 2025 based on K7 Business Plan levels of investment, Green Recovery, accelerated delivery, and transitional investment, along with regulatory true-ups and inflationary impacts and the impact of acquisitions and shadow RCV at 31 March 2024
4 Based on Water Group (SWW including Bristol Water and SES Water) - net debt at period end/forecast shadow RCV at 31 March
5 Real cumulative RORE on underlying totex, financing and ODIs with notional gearing
6 Nominal cumulative RORE based on underlying real RORE using actual gearing plus average inflation over K7 at 4.3%
7 As set out in our Trading Statement in September 2024
8 Pennon Group net debt excluding fair value adjustments/Water Group forecast shadow RCV at 31 March 2025 and effective value of the non-regulated businesses
Results presentation
A presentation of the Half Year 2024/25 results hosted by Susan Davy, Group Chief Executive Officer and Laura Flowerdew, Group Chief Financial Officer, will be available at 08:00am (GMT) today, 27 November 2024. This will be followed by a live Q&A session at 08:45am (GMT). The presentation and Q&A session can be accessed here: www.pennon-group.co.uk/investor-information
For further informationplease contact
Institutional equity investors and analysts
Louise Rowe - ComplianceESG and IR Director
01392 446 688
James Murgatroyd - FGS Global
020 7251 3801
Debt investors
Chris Tregenna - Group Treasurer
01392 446 688
Retail investors
Link Asset Services
0371 664 9234
GROUP CHIEF EXECUTIVE OFFICERS REVIEW
Overview
Water companies are rightly being challenged to do more for customers today and into the future. We are doing both, with good progress in K7, ensuring we are well positioned for the delivery of our 2025-30 (K8) Business Plan and in laying the foundations for sustainable future growth.
Our c.4,000 colleagues who live and work in the communities we support, care passionately about what we do, each day and I couldnt be more proud. Our customer and community roadshows continue to ensure we are hearing first-hand what matters most and as we fix the things they care about. From Bristol to Bournemouth, Devon, Cornwall, and the Isles of Scilly, and now Sutton and East Surrey, we continue to help customers to use less and save more with a range of money saving campaigns and pilots, leading the way.
Whilst South West Water (SWW) revenues are lower on a like for like basis due to our water efficiency initiatives, its the right thing to do and is protected by future regulatory mechanisms.
Agile group delivering for all in K7
As we are closing the K7 regulatory period we look back on a period of significant change for the Group. Our agility in delivering for all stakeholders has been a constant.
Following the sale of Viridor in 2020, as part of a highly disciplined strategic review
· we responsibly deployed capital, positioning the Group sustainably by minimising liabilities
· we have reinvested in UK Water with the acquisition of Bristol and SES at a total value of £0.6bn[9]
· we have recognised shareholder support through our K7 dividend policy of CIPH+2%.
We have made record investment in the asset base of c.£1.8bn[10] as we focus on the things that matter most. Alongside our acquisitive growth strategy this results in RCV growth of 75%[11].
We are also expanding our non-regulated business
our three retailers now having a combined market share of around 15% and our investments in Pennon Power are on track.
Customers have benefitted through our innovative first of its kind WaterShare+ scheme. Launched in 2020, this gives customers a stake and a say in our business and they have also shared in financial benefits.
Alongside this we have delivered solid relative sector performance with c.70% of ODIs met over the period and we have focused on supporting customers, keeping bills as low as possible through a drive for efficiency and providing tangible support to those who need it most achieving 100% affordability for the first time.
Reshaping our business to align with our four strategic priorities
To support the delivery of our outstanding and good rated Business Plans for SWW and SES we are reshaping the Group. We are putting more resources on the front line than ever before, with clear business lines, aligned to our four strategic priorities.
With Managing Directors in place for Water Services, Wastewater Services, Pennon Power and Retail Services, we have also commenced a Group-wide reshaping programme ensuring we have the right resources and capabilities, with more resources on the front line, supported by expert and streamlined corporate functions. Our supply chain partnership amplify has already been stood up and is on track to deliver £75m of accelerated investment to kick start our plans to reduce storm overflows.
At September 2024, our transformation and restructuring programmes have delivered, or are in progress to deliver, c.£35m of annualised savings. This is in addition to the synergies delivered through our acquisitions of Bristol Water and SES Water where we have delivered synergies of c.£18m and c.£2m, respectively, and are on track to achieve the savings we set ourselves at acquisition. This is a step towards our targeted annualised savings of c.£86m in K8.
Investment driving benefits
With over £300m of capital investment in SWW in the first half of 2024/25, we are investing to make sure we make good operational progress on our four priorities in the long term. We are well prepared to deliver almost double the rate of investment from K7 ending the period at the K8 run rate.
Building water resourcesimproving water quality
Our investments mean we are making good progress in providing a more resilient and diverse portfolio for water resources across Devon and Cornwall. This has been a monumental undertaking, with teams across South West Water and our supply chain partners. Blackpool pit has been fully operational since the end of March with construction completed at the new treatment works at Rialton. We have supplemented capacity in Cornwall by 4% in this half year, with 34% cumulatively achieved since 2022, alongside the 30% uplift to Devon. Overall, water resource levels are at 80% across Devon and Cornwall, and we achieved 100% supply demand balance index for the first time in the 2023/24 EPA.
There are always two sides to the coin to ensuring a sustainable supply demand balance, and reducing demand is also key to future resilience.
| Year | Revenue (£m) | Underlying EBITDA (£m) | Underlying (Loss)/Profit Before Tax (£m) | Non-underlying Items Before Tax (£m) | Loss Before Tax - Statutory (£m) | Loss After Tax - Statutory (£m) | Loss Per Share (p) | Adjusted EPS (p) | Basic EPS (p) | Dividend Per Share (£) | Capital Expenditure (£m) | RCV (£m) | Gearing (%) | SWW Cumulative RORE (real, notional) (%) | SWW Cumulative RORE (nominal, actual) (%) |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024/25 | 527.2 | 163.5 | (18.6) | (20.2) | (38.8) | (30.0) | (10.6) | (6.6) | (0.5) | 14.69 | 331.8 | 5,916 | 65.0 | 6.0 | 10.8 |
| 2023/24 | 448.6 | 168.5 | 9.1 | (5.9) | 3.2 | 1.8 | 0.5 | 3.6 | 3.2 | 14.04 | 266.3 | 5,536 | 64.4 | 7.3 | N/A |
Pennon Group Plc
Director/PDMR Shareholding